Most tailed bacteriophages and herpes viruses replicate genome as a concatemer which is cut by a 'headful' nuclease upon completion of genome packaging. Here, the catalytic centre of phage T4 headful nuclease, present in the C-terminal domain of 'large terminase' gp17, has been defined by mutational, biochemical and structural analyses. The crystal structure shows that this nuclease has an RNase-H fold, suggesting that it cuts DNA by a two-metal ion mechanism. The active centre has a Mg ion co-ordinated by three acidic residues, D401, E458 and D542. Mutations at any of these residues resulted in loss of nuclease activity, but the mutants can package linear DNA. The gp17's nuclease activity is modulated by the 'small terminase', gp16, by the N-terminal ATPase domain of gp17, and by the assembled packaging motor. These results lead to hypotheses concerning how phage headful nucleases cut the viral genomes before and after, but not during, DNA packaging.